Election Available to Carryback NOLs up to 5 Years – Set to Expire

On November 6, 2009, President Obama signed into law the Worker, Homeownership, and Business Assistance Act of 2009. In what was comforting news for many rocked by the recession, the new law extended and expanded special Net Operating Loss (NOL) carryback rules initially made available under The American Recovery and Reinvestment Act of 2009. This is a temporary extension, and is set to expire.

A taxpayer can bring an NOL into play to obtain a refund for taxes paid in prior years. Under normal circumstances, the carryback period is two years. The new law more than doubles that period, allowing up to a five-year carryback of NOLs and modifies the Alternative Minimum Tax (AMT) by suspending the 90 percent income limitation on the use of NOLs for determining the AMT for any carryback year.

The election for the extended carryback is available for any tax year ending after December, 31, 2007 and prior to January 1, 2010. As a result, a calendar year taxpayer can make the election for tax years beginning and ending in either 2008 or 2009. Taxpayers with Fiscal Years that begin in 2007 and end in 2008 may also be able to take advantage of this extension.

There is a special rule under the second act for a qualified small business that pre-elected under the 2009 Recovery Act to carry back 2008 NOLs. A qualified small business may make the election for an additional year. As a result, an eligible small business may be able to carry back NOLs from both 2008 and 2009 for up to five years. In addition, the 50 percent limitation does not apply to a qualified business that elected to carry back its NOLs under the 2009 Recovery Act. However, the 50 percent limitation still applies to the qualified small business’ 2009 NOL Carrybacks.

The final deadline for individuals to take advantage of this great tax refund opportunity is October 15, 2010. For corporations, trusts, and partnerships, the final deadline, with an extension is September 15, 2010.